It’s not surprising to see airports put out incentive packages to bring in new flights, but there was something about the deal Delta did to bring Transatlantic flights to Indianapolis that grabbed my interest. The Indianapolis Business Journal wrote about the hefty subsidy and gave good insight into how Delta views this opportunity.
As you may or may not know, Delta 500 (a little bit of vanity flight numbering to celebrate the Indy 500 car race) first takes to the skies on May 24 at 6:12pm. It puts down at Paris/Charles de Gaulle the next morning at 8:35am. The return flight comes back in the afternoon, so the 767-300ER only spends an hour and 45 minutes on the ground in Indy. It runs daily during the summer, but then the rest of the year it’s sub-daily with anywhere from three to five flights a week as of now. But I imagine that schedule is highly dependent upon how bookings ramp up.
This route was something of a surprise, but there is precedent. Delta took money to start a Pittsburgh to Paris route a few years back with a 757. The money is gone, but Delta still operates the route during the summer, now on a 767.
Indianapolis is a little different. It’s too far to start off with a 757, so it requires the 767 right off the bat. It is, however, a place with more Delta loyalty than Pittsburgh. After all, Indianapolis was “red tail” country, a big part of Northwest’s old “Heartland” strategy. With Southwest continuing to grow there, Delta probably has long looked at ways to solidify its standing. A flight to Europe is one way to help, especially with companies that travel internationally. Give them a European route (which despite what the article says, is a Delta hub thanks to the Air France joint venture), and you can put together a nice contract to get their domestic business as well.
But Delta wasn’t going to just go into this without an incentive. After all, it requires a pretty expensive asset flying a long distance. Further, Transatlantic service is something that Indianapolis has drooled over for years. If Delta couldn’t get a good incentive to make this work, the airline would have been completely inept. And we all know that’s not the case.
Normally, incentives are meant to guarantee certain minimums. It helps an airline to know that if it can’t attract enough passengers at a decent fare, it has the revenue guarantee kick in to keep the flight from bleeding red. But this one was set up differently.
As the paper notes, there’s a deal that runs for two years. For the first year, Delta gets $55 per passenger each way up to $3.5 million in total subsidy. For the second year, it’s $35 per passenger each way up to $2 million. The paper did the math, and Delta needs to fill somewhere between 50 and 60 percent of seats to get that full amount. (This can vary if Delta changes capacity, of course.)
This suggests one of two things. Either Delta is concerned that it won’t be able to fill its airplanes up much past 60 percent, so it needs a revenue boost on the seats it can sell (maybe more of a winter concern). Or Delta isn’t worried about filling airplanes up at all. It’s just concerned about generating the kind of fares it needs to be profitable (possibly more of a summer concern).
This isn’t an insignificant amount of money, especially in the winter when fares are much lower. Let’s say Delta sells a $750 roundtrip fare. That’s not unreasonable to see in the off-peak season, especially when you consider that connections via Paris have to be prorated anyway (even after Air France inevitably cancels the ongoing flight thanks to a strike). More than $100 of that is coming out in taxes and fees, so Delta is only going to see maybe $600 to $650 at best. This guarantee is going to pay out $110 to Delta for that roundtrip traveler, so you’re talking a huge boost to the average fare.
If this goes as planned, the route will develop quickly, and by the time the subsidy goes away, Delta will find the flight on solid footing. If it goes extremely well, it could sustain as a year-round flight. Were I a betting man, I’d say we’ll see this end up like Pittsburgh as a summer-only option, but it’s an untested market so we don’t know for sure.
Delta spokesperson Morgan Durrant was quoted as saying, “You look at what our large competitors are doing, and it’s not quite this.” There may be some nuance, but it’s fairly similar to what British Airways and American are doing. The difference is that BA is using its own airplanes to do flights to smaller cities like Nashville and New Orleans. But thanks to the joint venture, it doesn’t matter which airplane gets used.
This does, however, shine on a light on United’s seeming lack of willingness to play in this space. United’s joint venture with Lufthansa goes back many years, yet you see very few flights connecting non-United hubs in the US to Lufthansa Group hubs in Europe, other than those larger cities with Lufthansa has flown for many years. Sure there have been a couple experiments like San Jose to Frankfurt, but these airlines are well behind the type of integration you see with the other big guys starting to drill down into medium size cities. Delta, however, seems like what it sees in this space, especially if it can get healthy subsidies like that one Indy is giving out.
